Restoring credit score after defaulting on student loan

Opening Credits columnist Eric Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for

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Question Dear Opening Credits,
I had student loans that were in deferment. I did not know they were no longer deferred. They led me to believe as long as I didn't have a job, I would be OK. They switched companies, and I started getting letters saying I was 200-plus days behind on payments. I made the missed payments plus extra and kept making monthly payments until they automatically deferred since I'm back in school.

I then applied for a CareCredit medical credit card to take my pet to a specialist, but was denied because of my credit. That's when I learned my credit was bad. I have no bills currently except under my parents (still live at home). If I take my loans out of deferment and make the minimum payment, how long should it take to bring my score up?  -- Shayne 

Answer Dear Shayne,
You've just learned an important lesson: Always double-check the information given to you to make sure it's right. If you don't, you run the risk of acting on incorrect instructions. This is especially crucial for financial matters. I'm sorry you ran into this problem, but glad you've already started to rectify it. And yes, you can definitely fix it even further!

I'm glad you got the deferment in the first place, though. These temporary loan holds are well worth the application trouble if you need some time (up to three years) before having to pay. While they are in this formal state of suspension, there will be no negative credit repercussions to you. Even better, if you have a direct subsidized loan, federal Perkins loan or a subsidized federal Stafford loan, the government may pick up the tab for the interest during deferment.

However, if you miss the date when the deferment ends, the loan holder will start to report you to the credit bureaus as late on your payments. Every subsequent month without a payment results in deepening credit damage. Apparently you were more than six months past due by the time you received notice of the delinquency. A loan this delinquent will definitely have a negative impact on your credit rating.

Either the person who explained the deferment process was wrong or you misunderstood. The fact is, there is no automatic rollover for deferments. Even if you remained unemployed when the deferment ended, you would have to reapply for another one. You'd have to wait for approval. If you were denied, you'd have the opportunity to apply for a forbearance, which is a similar to a deferment and puts your loans on hold for up to 12 months, but you'd be responsible for the financing fees.

Presuming that the late payments are legitimate, they can continue to appear on your credit report for a total of seven years. They are also factored into your credit scores. Payment history is the most important factor in your credit score  

When you applied for the CareCredit card, your credit reports and scores were impacted enough to prompt a rejection.

The good news is that you're back on track. You've done everything you can to make amends with that lender. To improve your credit further, show that you can now borrow money and pay it back with no problem.

An easy way to do so is by becoming an authorized user on another person's credit card account. Ask your parents if they are willing to add you as an authorized user to one of their cards. If they agree, you can rebuild your credit by using the card well. In fact, as long as the account stays in good standing, no matter who is charging and paying, you'll reap the benefits. You'll be happy to know that you can rebound from credit damage in as little as a year.

If your parents aren't in the habit of paying their bills on time, however, becoming an authorized user on their cards will hurt your credit even more, so that's not an option you'll want to pursue. Your parents might also refuse to make you an authorized user. In either case, I would recommend that you explore getting a secured card. A secured card requires that you deposit some money upfront, which the card issuer will use as collateral in case you miss payments. Just make sure that the secured card issuer reports all payment activity to the credit bureaus. Then charge small items and pay the entire balance back every month.

As for taking the loans out of deferment and beginning to deal with them now, that is an option, too. Steady payments on them will help your scores, as will your declining balance. But only do so if you have the means to repay. If you're in school, can you really get a job that pays enough for the loan and fulfill your educational goals? If not, keep the loans where they are until you can afford repayment. 

See related: Student loan repayment troubles? Don't delay

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Updated: 01-19-2019